Hey, Nonprofiteer, here’s my beef:
Every pay period I take money from our payroll account; but instead of giving it all to our employees, I have to pay a big hunk of it in taxes–and believe me, we don’t have any too much to spare around here. If we’re a tax-exempt 501(c)(3), shouldn’t we be able to use that money for the good of our agency and clients instead of forking it over to the Feds? How can we work this out?
Signed, Tax-free and Cash-poor
Hey, Free and Poor:
If you decide to take your employees’ withholding taxes and “use that money for the good of our agency,” you can “work this out” by being imprisoned and poor instead, alongside every single member of your Board. Creative as you are, you’re not actually the first person to figure out that there would be a lot more money available to nonprofits if they just skipped that annoying remittance every pay period, as a result of which the IRS imposes personal liability on every executive and Board member of an agency attempting this little maneuver, not to mention an additional 20%–you read that right, one-fifth again–in interest and penalties.
Why? Because here’s the deal: a 501(c)(3) is exempt from Federal taxes on income that it generates. You may also be exempt from State sales taxes, if you’ve filed a separate application for that purpose with your Secretary of State. But what you send to the government every pay period isn’t YOUR taxes–it’s your employees’ taxes, which they’ve asked to have withheld in advance so they don’t face a huge bill on April 15. Trying to use that money for something else constitutes stealing from your employees, and there’s no special nonprofit exemption from the general prohibition against thievery.
Besides, you’ll get caught. Most nonprofit executives who “borrow” withholdings to get through a cash crunch assume that the IRS is big and they’re small and no one will notice. Most such executives get a rude awakening when it takes less than a year for the IRS to exhaust its patience (in the form of dunning notices) and simply levy their bank accounts for the balance due.
If you’ve been trying this in a small way–a common device is to write the IRS check but throw it in a drawer, so you have the comfort of knowing there’s actually more money in the account than there appears to be, reducing your risk of bouncing all the other checks you write; in theory, you’ll mail the IRS check when that big grant comes through–clean it up NOW and come clean with your Board about it in executive session.
And if you’ve found someone who’s been willing to sign off on your year-end audit despite a mysterious trail of uncashed checks to the taxing authorities, you might mention to him/her that accountants too are eligible for all-expenses-paid stays with Uncle Sam–all expenses paid, that is, after the accountant joins the Board and Executive Director in paying the taxes, interest and penalties.